Call for tax to rein in high-speed trading

Fund managers have called for a new tax to clamp down on high-frequency traders and prevent “predatory" behaviour on the sharemarket.

The Financial Services Council, which represents the country’s investment managers, said the measure was needed to prevent Australia going down the path of the United States, where fears are growing that high frequency traders are running out of control.

FSC chief executive
John Brogden
rejected any suggestion of an outright ban on high-speed trading of shares, but said regulators needed to keep a tight rein on the sector to prevent market manipulation and negative consequences for investors.

“Both dark pools and high-frequency trading have a legitimate role to play in the market and as such we reject any calls for a moratorium or a ban on high-frequency trading in particular," Mr Brogden said .

“However, there is no doubt there is a need for regulation to keep pace with technological changes and with those who are outliers in the market place and would seek to distort or abuse the market."

In a major report, the FSC concluded that most high-frequency traders were not engaged in predatory behaviour that could cause problems for investors.

However, the FSC warned that a small minority of high-speed trading – estimated at about 5 per cent – could be deemed as “toxic or harmful". This included “front running" of fund managers, where traders see the orders of other investors and use their high-speed computers to place their own trades ahead of these.

There were also concerns about “quote stuffing", where high-speed traders flood the market with a large number of orders for trades that are never executed, frustrating genuine investors.

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“The activities that really concern us are the predatory type activities where people are trying to observe what is going on in terms of large orders and get ahead of those orders," Schroder Investment Management Australia chief executive
Greg Cooper
said.

“That is the behaviour frankly that as a ‘buy-side’ person we are most actively trying to get away from. ­Certainly our view of the overseas experience is very negative. And people often look to the US more broadly in financial services as the country at the forefront of technology. In the high-frequency trading world, that is not a place we want to go.

“Australia is certainly not there yet and I think ASIC [Australian Securities and Investments Commission] is making the right moves to make sure we don’t end up in that sort of ­situation."

High-frequency traders use sophisticated computer algorithms to buy and sell large volumes of shares in short spaces of time, which they often hold for just a few seconds. They are estimated to account for as much as a quarter of all activity on the Australian sharemarket.

But concerns have been growing about the practice ever since it was blamed for exacerbating the “flash crash" that wiped $US1 trillion off Wall Street in just minutes in 2010.

Under the FSC’s proposal, high-speed traders that make excessive orders for traders – also known as “messages" – that are not executed would be penalised with a new tax.

The FSC has also raised the prospect of forcing high-speed traders to hold their positions for a minimum time, to prevent the market from ­getting out of control.

“Definitely, high-frequency trading suggests the potential for destabilisation and predatory behaviour in the market," said David Walsh, a researcher who compiled the FSC report on high-frequency trading.

“There isn’t really any true evidence we can find in Australia of genuine predatory high-frequency trading.

“There are activities that can be identified that look potentially like quote stuffing behaviours, which occur in high frequency trading in the US.

“But those things are not really noticed in Australia."

Mr Brogden said any tax on orders should be levied only on those traders that put excessive “messages" through the market, so that it does not affect genuine investors.

“We think ASIC has got the tone of the regulation right," he said.

“If ASIC continues with that tone and we don’t see knee jerk reactions and we move away from a blunt call just to close the thing [high-frequency trading] down, then there will be ­reasonable regulation of the market."

Mr Brogden praised ASIC’s record of dealing with high-speed traders but said vigilance was needed.

“Ongoing regulation of dark pools and HFT will be the norm in our view," he said. “Such is the nature of the dynamism of these markets that we expect that there will be continued debate on regulation and ASIC will respond with the need to regulate.